NZCPR Newsletter: Winds of Change

US President Donald Trump’s tariff policy is changing by the day, as international investment markets experience unprecedented volatility.

It all started last week in the White House Rose Garden, when the President revealed his tariff plan to address US trade imbalances and protect American economic interests.

The tariff rates reflected a combination of economic, political, and strategic objectives, with the specific methodology based on trade deficits.

The basic tariff for a country was calculated as one half of the ratio of the US trade deficit with a country, to that country’s exports to the US.

For New Zealand, since the US only exported $4.5 billion worth of goods to us in 2024, while we exported $5.6 billion worth of goods to them, the US trade deficit was $1.1 billion. So, our tariff was calculated as one half of the ratio of $1.1 billion to $5.6 billion [1/2x($1.1/$5.6)=0.098] or 9.8 percent - resulting in the minimum rate of 10 percent.

Countries with the largest trade imbalances were hit with the highest tariffs, which ranged up to 49 percent.

There were a number of special cases including for countries where penalty tariffs were being applied because of their involvement with illegal drug supply chains, as well as exclusions for goods like aluminium and steel, which already had tariffs applied during the President’s first term.

Goods deemed critical to the US were exempted from the new regime, including pharmaceuticals, lumber articles, and minerals sourced from a range of countries including New Zealand.

So how will the tariff changes affect New Zealand?

This week’s NZCPR Guest Commentator, Economics Professor Niven Winchester of Auckland University of Technology analysed the likely impact of the tariff rates announced by the President:

“To estimate the impacts of this tit-for-tat trade standoff, I use a global model of the production, trade and consumption of goods and services. Similar simulation tools – known as ‘computable general equilibrium models’ – are widely used by governments, academics and consultancies to evaluate policy changes.

“Some nations gain from the trade war. Typically, these face relatively low US tariffs - and consequently also impose relatively low tariffs on US goods. New Zealand (0.29 percent) and Brazil (0.28 percent) experience the largest increases in GDP. New Zealand households are better off by US$397 per year.”

Auckland University’s Professor Robert MacCulloch suggests one of the reasons New Zealand could see a rise in GDP per capita of around NZ$700 per person is that, facing higher prices “demand from US consumers will drop. To the extent overseas producers try to increase sales by selling more into markets like New Zealand, we will become spoilt for choice and pay lower prices.”

In his address, President Trump explained the reasoning behind his tariff policy:

“I, Donald J Trump, President of the United States of America, find that underlying conditions, including a lack of reciprocity in our bilateral trade relationships, disparate tariff rates and non-tariff barriers, and US trading partners’ economic policies that suppress domestic wages and consumption, as indicated by large and persistent annual US goods trade deficits, constitute an unusual and extraordinary threat to the national security and economy of the United States. I hereby declare a national emergency with respect to this threat.”

He explained that in January he had asked his administration to investigate the cause of the country’s large trade deficits and report on the economic and national security implications.

They found, “Large and persistent annual US goods trade deficits have led to the hollowing out of our manufacturing base; inhibited our ability to scale advanced domestic manufacturing capacity; undermined critical supply chains; and rendered our defense-industrial base dependent on foreign adversaries.”

In other words, instead of trade deals with the US being reciprocal, with each country importing and exporting around the same value of goods, the US imports far more than they export. This has severely undermined their manufacturing base, resulting in fewer jobs and a less resilient and independent country.

The President said he wanted to re-establish reciprocity in trade to enable the US to strengthen its economic base and rebuild a security umbrella for citizens and allies.

His ultimate goal is to use tariffs to switch the US from taxing labour to taxing imports, using the funds collected to lower income tax towards zero for most Americans.

Tariffs have played a big part in American history. It’s how the US government funded itself in the early years. One of the first laws ever passed by the Congress was the Tariff Act of 1789, which imposed a five percent tax on most imports. For over a century, tariffs provided over 90 percent of the federal government’s revenues, and for the next 50 years, they provided around half.

It wasn’t until Congress introduced income tax in 1913 that tariffs began to decline. During the Great Depression rates peaked at nearly 60 percent, but over recent years they have dropped to around 4 percent. Last year tariffs accounted for just 1.5 percent of the total US tax revenue.

During his announcement, President Trump warned that retaliatory actions by trading partners would trigger reprisals - but he also explained that if countries sought to remedy the trade imbalance, an adjustment could be considered: “Should any trading partner take significant steps to remedy non-reciprocal trade arrangements and align sufficiently with the United States on economic and national security matters, I may further decrease the duties imposed under this order.”

And that’s what’s happened. With more than 75 countries approaching the administration to remedy their trade imbalances, the President has now announced a 90-day pause during which all tariff rates have been reduced to a blanket 10 percent – except for those countries that retaliated.

Whether rates will stay at 10 percent in the long term, or go higher, remains to be seen.

The scale and speed of President Trump’s reforms is breathtaking.

He’s able to move at pace because he has control of the US Government. That window may close in two years’ time when Congress holds its mid-term elections for all 435 seats in the House of Representatives and a third of the 100 seat six-year-term Senate.

With no guarantee that the Republicans will continue to hold a majority, the President knows there is no time to waste in pushing ahead with his reforms.

In comparison, the three-year term of New Zealand’s Parliament gives our Governments the opportunity to dither!

And that’s what the Coalition appears to be doing according to former ACT Leader Richard Prebble, who explained in a recent Herald article why he opposes ACT’s proposal to extend the term of Parliament from three years to four:

“Parkinson’s law, that work expands to fit the time available, is true for Government. Give politicians another year and they will take longer to do the same amount of work. The knowledge that the Government must account to the electorate in three years is a huge incentive to make decisions…

“In this year’s Budget, the media reports the Finance Minister will have a ‘bonfire of vanity projects’. Her Budget last year must have funded these vanity projects. The minister has ruled out abolishing any of New Zealand’s 32 departments, ministries and agencies. The way to permanently reduce spending is to abolish the agencies that are themselves vanity projects…

“The Prime Minister has sternly demanded local government stick to the basics. It is advice that he should also apply to central Government. A three-year term has failed to motivate the Coalition into making timely decisions that it knows are necessary. Having another year would just result in more procrastination.”

The law change enabling a four-year term of Parliament was part of ACT’s Coalition Agreement. Both National and New Zealand First have agreed to support the Bill to a Select Committee.

Submissions on the Term of Parliament (Enabling 4-year Term) Legislation Amendment Bill close at 1pm on April 17 – full details can be seen HERE. Submissions on an associated Bill, the Referendums Framework Bill, also close on April 17 - see HERE.

Justice Minister Paul Goldsmith is in charge of the Bill and told the House: “At this stage, no decisions have been made on whether this Bill will proceed beyond this… Future decisions will also need to be made by the Government as to whether the bill proceeds as introduced, or whether it should be amended… We want to hear what New Zealanders think during the select committee process.”

On this occasion the Government is clearly listening, so if you have strong views on extending the term of Parliament, you should send in a submission.

The Bill would allow a new Government to do a deal with opposition parties - within three months of an election - to extend the Parliamentary term from three years to four, in return for giving the Opposition effective control of the Select Committees.

But, as Richard Prebble says, this could be a recipe for mayhem: “In principle the bill is wrong. Politicians should not be able to make a deal with the Opposition to extend their time in power. In practice, having the Opposition chair select committees is a recipe for chaos. An unprincipled Opposition, protected from defamation, could turn the select committees into Star Chambers...”

There are many arguments against extending the Parliamentary term, but perhaps the strongest reason for not doing so is the thought of having to endure a government like the 2020 Ardern administration for four years instead of three. By imposing a cancerous agenda onto our country during their three years of unbridled power, they did incalculable damage. Imagine the carnage another year would have caused!

Since extending the term of Parliament represents a major constitutional change, if ACT’s Bill becomes law, it would need to be approved by a binding referendum of voters.

Should this be the case, there are two other crucial constitutional matters that New Zealanders need to have a say on. These are whether the voting age should be lowered from 18 to 16, and whether the Maori seats should be retained or abolished.

All three issues should be combined into a “Constitutional Referendum” and put to voters at the next election.

With Labour, the Greens and the Maori Party all supporting the call to lower the voting age, it is crucial that New Zealand voters are given the opportunity to dismiss this concept once and for all.

And with the Maori seats already causing an overhang in Parliament - as well as having a disproportionate influence - the Maori Party’s aggressive campaign to switch voters onto the Maori roll to increase the number of Maori Seats has become a critical concern for voters.

This outcome was predicted by the 1986 Royal Commission on the Electoral System, which warned that if MMP was introduced without the Maori seats being abolished, the resulting over-representation of Maori in Parliament, would have a discriminatory impact on other New Zealanders.

Their recommendation was for “no separate Maori constituency or list seats, no Maori roll, and no Maori option… All New Zealanders would vote in the same way.”

Given the increasing radicalisation of the Maori Seats within our Parliament, and the disruption that is now causing, New Zealanders deserve to be given the choice between apartheid or democracy.

A binding Constitutional Referendum asking the following three questions would give voters their chance to have a say on matters central to our democracy and way of life:

1. Do you support a law change enabling a four-year term of Parliament?

2. Should the voting age be lowered from 18 years to 16 years?

3. Should the Maori seats be retained or abolished?

If you agree with the concept of this Constitutional Referendum, then please share it with others - and let your MPs know – as it is only through public pressure that change can occur.

Don’t forget all MP email addresses can be found at the following NZCPR website link: https://www.nzcpr.com/have-your-say. 

Please note: To register for our free weekly newsletter please click HERE.

THIS WEEK’S POLL ASKS:

*Do you support the concept of enabling the term of Parliament to be extended from three years to four years? 

Dr Muriel Newman established the New Zealand Centre for Political Research as a public policy think tank in 2005 after nine years as a Member of Parliament. The NZCPR website is HERE. We also run this Breaking Views Blog and our NZCPR Facebook Group HERE.